Market Review: January 27, 2025

Closing Recap

Monday, January 27, 2025

Index

Up/Down

%

Last

DJ Industrials

289.33

0.65%

44,713

S&P 500

-88.96

1.46%

6,012

Nasdaq

-612.47

3.07%

19,341

Russell 2000

-23.72

1.03%

2,284

 

 

 

 

 

 

 

 

 

U.S. stocks slumped following a downdraft in the tech sector as the Chinese AI company DeepSeek has put into question US AI valuations. Chinese startup DeepSeek’s AI assistant, which was released a few weeks ago is now the top-rated free app on Apple’s App Store in the U.S. sending AI-related tech stocks lower. The popularity of the app, positive commentary on its ability from tech gurus, and allegedly operating at a fraction of the cost that U.S. AI models like ChatGPT, has raised concerns about AI investments, monetization, and the U.S. government’s chip/technology restrictions to maintain the supposed U.S. lead in A.I. Overall, many asset classes saw weakness with gold, Bitcoin, and oil prices all falling ahead of a busy week that includes the FOMC policy meeting mid-week, the ECB policy decision Thursday, PCE inflation data on Friday and roughly 23% of the S&P 500 reporting this week including AAPL, META, MSFT and TSLA among others. Note tariffs also loom large over global markets as U.S. and Colombia stopped short of a trade war over the weekend, but the spat was a reminder that tariffs on Mexico and Canada are to take effect on February 1, unless there is an agreement to avoid them.

 

The weakness in the semiconductor sector (SOX) was breathtaking, falling as much as -10% or 550 points under 4,800 with shares of NVDA breaking below its 200-dma support level ($121.75) for the first time since January of 2023 on DeepSeek competition concerns. Wells Fargo also noted DeepSeek news is roiling data center stocks saying while it could create risks on longer-term hyperscale training capex, it also may accelerate inference demand growth and enterprise adoption of AI (though they said they doubt near-term hyperscale spend is at risk). Still, today was a take no prisoner day in the world of US AI, as chip names (NVDA, AVGO, ARM), data center infrastructure names (VRT, ETN, PWR), server makers (SMCI, DELL), nuclear/power names (CEG, NRG, VST, TLN, SMR, OKLO) that are seen as needed to power the AI revolution, as well as AI related impact names (GOOGL, ORCL, MSFT, AI) were all casualties. While several Wall Street analysts defended shares of the group, they remained weak on Monday with several 20% declines!

 

Amazingly though, while broader markets were lower, it was basically the big Tech that did most of the damage (as well as derivative type plays like utility/power stocks) as overall market breadth was positive, led by defensive assets such as consumer staples, REITs and Healthcare. The Dow Jones Industrial Averages ended much higher as strength in JNJ, JO, PG, AAPL, TRV and CRM helped propel the index higher, offsetting the NVDA, CSCO, MSFT weakness.

Economic Data

  • December New Home Sales rise 3.6% to 0.698M unit annual rate, above consensus 0.675M as Dec single-family home sales +3.6% with the Northeast +41.7%, Midwest -3.3%, South -2.1%, West +20.3%; new home supply 8.5 months’ worth at current pace vs Nov 8.7 months; median sale price $427,000, +2.1% from Dec 2023 ($418,300).
  • U.S. Dallas Fed manufacturing index surged to 14.3 in January rising to 4.5 (was 3.4) in December, which was the first positive reading since April 2022. Today’s print is the highest since October 2021. Improvement was broad based as the employment gauge edged up to 2.2 after sliding to 0.4 (was 0.3) previously. However, prices paid also increased, rising to 17.5 after dropping to 12.1 (was 10.5) in December.
  • China’s manufacturing activity contracted in Jan, hitting its slowest pace since Aug as factories wound down ahead of the eight-day Lunar New Year holiday. The official manufacturing PMI fell to 49.1 (est. 50.1, prev. 50.) The non-manufacturing PMI also dropped to 50.2 (est. 52.2, prev. 52.2). Composite PMI declined to 50.1 from 52.2.
  • China industrial profits fell -3.3% ytd in December (prev. -4.7%) and were up 11.0% in December YoY (prev. -7.3%).

Commodities, Currencies & Treasuries

  • Crude oil prices slide on fears of potential U.S. trade tariff impacts on different trading partners, a report that sanctions are having limited effect on Russian oil exports and a weak Chinese manufacturing reading. U.S. WTI crude oil futures dropped -$1.49 or 2% to settle at $73.17 per barrel while Brent crude fell -$1.42 or 1.81% to settle at $77.08. Nymex natural gas settles down 8.2% at $3.697/mmBtu, after falling 10% earlier in the session.
  • February gold prices stumbled on Monday, falling -$40.50 or 1.46% to settle at $2,738.40 an ounce as most asset classes declined on the day in a surprising rout on Wall Street led by technology stocks. Bitcoin prices fell over 5% back below $100,000 amid a sell-off across various asset classes. The dollar index (DXY) ended slightly lower on the day around 107.40 after tumbling nearly -2% last week.
  • U.S. Treasury prices advanced as yields tumbled to lowest levels since early January as investors sought the safety of government bonds, with tech stocks sinking on the emergence of a Chinese discount artificial intelligence model. The benchmark 10-year Treasury yield fell to a four-week low, last down -9 bps at 4.532%. The shorter-term 3-, 5-, and 7-year yields all slid to six-week lows ahead of the FOMC this week.
  • The US sold $69B in 2-year notes at a yield of 4.211% vs. 4.210% (first tail since October) when issued prior with bid-to-cover ratio at 2.66 (vs. prior auction 2.73), as primary dealers take 13.71% of U.S. 2-year notes sale, direct 21.27% and indirect 65.02%.

 

Macro

Up/Down

Last

WTI Crude

-1.49

73.17

Brent

-1.42

77.08

Gold

-40.50

2,738.40

EUR/USD

-0.0003

1.049

JPY/USD

-1.39

154.60

10-Year Note

-0.095

4.529%

 

Sector News Breakdown

Retail, Consumer Staples & Restaurants:

  • Defensive Consumer Staples outperformed given the pullback in technology today on AI valuation fears as food stocks led gains with big gains from CAG, THS, UTZ, KHC, CPB, GIS among leaders. Smithfield Foods (SFD), the U.S. division of Chinese pork producer WH Group, priced its shares between $23-$27 apiece ahead of a planned IPO on Jan. 28. At the midpoint of the range, the company would be worth $11B, including net debt.
  • In Restaurants: BLMN was downgraded from Neutral to Underperform at Bank America noting over the past 10 years, Bloomin’s transaction growth has declined -~2% annually on average for its brands, including a -1.1% traffic CAGR at its largest brand, Outback (Outback US accounted for ~51% of Bloomin revenue in F24; after the Brazil licensing BAML estimate that will increase to ~53%). PTLO was upgraded from Hold to Buy at Stifel and raised tgt from $13 to $16 after a recent meeting with management noting the company has intensified efforts to address weak traffic trends while indicating a willingness to promote value more aggressively if needed.

Homebuilders, Building Products, Home Furnishing:

  • In Homebuilders: the sector outperformed (LEN, TOL, BZH, KBH) as mortgage rates slid along with Treasury yields.  DHI was downgraded from Buy to Neutral at Bank America (tgt to $150 from $160) saying housing demand has moderated with higher rates and input costs are rising and the firm believes DHI is prudently adjusting to a more challenging backdrop, but it expects margin headwinds to persist through F2025. SDHC was also downgraded at Bank America, cutting from Neutral to Underperform (tgt to $22 from $33). PHM was downgraded to Sell from Neutral in the homebuilding sector at Seaport Global.
  • In Building Products: QXO took its all-cash $124.25 per share takeover offer to BECN shareholders after the building-products distributor rebuffed its overtures. Recall Beacon earlier this month rejected a $11 billion takeover offer from QXO saying its proposal "significantly undervalues" the company.

Energy, Industrials and Materials

  • Nuclear/Utility stocks tumbled (CEG, VST, GEV, OKLO, SMR, NNE) along with technology AI shares on the DeepSeek China AI news, which are expected to see a surge in demand from power-hungry data centers needed to develop AI technology, tumble. Chinese startup DeepSeek rolled out a free AI model that it says uses lower-cost chips and less data, lessening investors’ faith in the profitability of AI.
  • Non-nuke utilities outperformed markets with big gains in AEE, AEP, DUK, SO and others as the group is benefiting from lower yields (the XLU however -2.6% overall as declines in nuclear names CEG, VST skewing sector view). AEE was downgraded to Equal Weight from Overweight saying valuation is already reflecting Ameren’s earnings accelerating to the high end of the guided range. The firm also downgraded PEG to Equal Weight from Overweight as expect PSEG’s fiscal 2025 EPS guidance to miss the consensus estimate of $4.03.
  • In Industrials: EMR said it will acquire all outstanding shares of AZPN it does not already own for $265 per share in an all-cash tender offer valuing AZPN at $16.8B (Emerson currently owns about 57% stake in AZPN). Shares of Electrical and mechanical engineering firms (FIX, EME) that help build data centers are caught in a broad market downturn after Chinese upstart DeepSeek said it developed top-performing AI models at a fraction of the time and cost of U.S. tech giants.
  • In Metals & Mining: In steel sector, the WSJ reported Activist investor Ancora Holdings is preparing to wage a proxy battle at U.S. Steel (X) and wants the company to turn the page from its failed marriage with Nippon Steel, citing people familiar with the matter. Ancora intends to rally shareholders around a plan to oust U.S. Steel’s chief executive and drop litigation to salvage a merger with the Japanese steelmaker. Gold miners declined (AEM, NEM, GOLD) after a pullback in precious metals.

Financials

  • In Lending: SOFI shares slid after Q4 results came in better than market expectations, which included a significant income tax benefit that boosted the bottom line while revs jumped 19% to $734M (vs. est. $674.6M) and guided the year outlook above; but shares fell as the next quarter guide was short of consensus after a good run-in shares. FMCC and FNMA were both downgraded to Underperform from Market Perform at KBW saying they see a downside from current share price levels given their scenario-weighted price target methodology.
  • In Crypto: Bitcoin prices dropped under $100,000 but Bitcoin miners saw especially sharper pullbacks with mid teen % to 20% declines for names like BTDR, CLSK, CORZ, HUT, HIVE, IREN, MARA, RIOT and WULF among them

Biotech & Pharma:

  • ALLK shares tumbled after saying it decided to discontinue further clinical development of AK006 after the experimental drug did not show clinical benefit in an early-stage trial testing it in patients with chronic spontaneous urticaria.
  • AKRO shares jump after reported prelim results from mid-stage trial testing its lead experimental drug to treat liver scarring caused by metabolic dysfunction-associated steatohepatitis saying 39% of patients treated with drug efruxifermin showed reversal of liver scarring with no worsening of MASH, compared to 15% for placebo.
  • ETNB shares jump after AKRO drug data as Cantor noted Akero announced its preliminary topline 96-week data from Phase 2B study of efruxifermin in F4 MASH. These data have important read to ETNB given the company is also evaluating an FGF21 analog, pegozafermin in F4 MASH. Thus, data provides a clearer picture for mkt potential
  • NTLA was downgraded to Equal Weight from Overweight at Morgan Stanley and slash tgt to $11 from $56 saying they now expect a more measured launch of the company’s lead drug for ATTR, and it sees a lack of catalysts this year (given recent discontinuation of ‘3001 AATD program) – also lowers ests for VRTX/CRSP’s CasGEVy.
  • TVGN said it is expanding its partnership with MSFT to use AI to improve its immunotherapy treatments.
  • VERU said its experimental drug in combination with NVO’s weight-loss treatment Wegovy, helped preserve muscle in older patients with obesity, meeting the main goal of a mid-stage study. But shares fell as patients receiving Veru’s drug and Wegovy did not shed more pounds compared to those on Wegovy and placebo. The company also did not disclose safety data from the study.
  • WBA shares fell after CNBC’s David Faber said talks for the pharmacy chain to sell itself to Sycamore Partners basically have been scrapped.

Technology

  • Semiconductor stocks tumble led by NVDA, SMCI, AVGO, ARM, ASML, ALAB, etc. in a downdraft amid the biggest story of day in AI Chatbots. Almost anything AI related seeing weakness today on the headlines noting the rapid rise of DeepSeek, a Chinese AI startup that rattled markets. Everything from semiconductors (NVDA, ARM, AVGO, SMCI), data centers (DLR, EQIX, VRT, DELL), nuclear plays (CEG, VST, TLN, OKLO, SMR, NRG) all get hit hard. QRVO upgraded to Overweight from Neutral at Piper and raised tgt to $110 from $85 based on the potential for improving fundamentals given Starboard’s involvement in the company. In the firm’s view, QRVO’s current setup is ripe for this activist to come in and derive operational and capital efficiencies.
  • In Telecom: AT posted Q4 results that topped Wall Street projections, including better-than expected increases in mobile-phone customers and fiber-based internet subscribers (added 482,000 net monthly bill-paying wireless phone subscribers in the holiday quarter, outpacing analysts’ estimated gains of 424,550); notched revenue of $32.3 billion in the period, a 1% increase over last year (follows better VZ results last week).
  • In Media & Advertising: SBGI lowers Q4 revs view for Local Media segment media to $931M-$933M, down modestly from the Company’s previously disclosed guidance of $936M-$945. IPG was upgraded to Overweight citing merger with OMC, but mainly reducing estimates for FX headwinds, while also previewing its expectations for 2025 guidance. Since the merger announcement on Dec 9, OMC shares are down 16% and IPG is 2% lower (vs. SPX flat); the stocks have traded largely in-sync since the day following the news.

Hardware & Software movers:

  • LGTY signed a buyout deal with Aptean, a privately owned provider of enterprise software solutions, as LGTY shareholders will receive $14.30 per share, representing a 27% premium to its Jan. 23 closing price.
  • RNG downgraded from Overweight to Equal Weight at Barclay’s and lower tgt to $37 from $45 on possible underperformance as believes there is less upside to 2025 Street numbers as RNG’s collaboration market would be a lower priority add in an improving macro and since RNG faces stronger Zoom/Teams competition.
  • TTWO was upgraded to Buy from Neutral at UBS and raised tgt to $230 from $175 saying with increased conviction in GTA VI demand and a robust lineup of other titles, the firm expects bookings, profits and FCF to inflect over the next two yrs, lowering leverage and freeing capital for accretive investments.
  • TWLO upgraded to Buy at Goldman Sachs and raised tgt to $185 from $77 as sees an inflection point in their business given cost reduction initiatives and ongoing efficiency measures which support strong FCF generation ahead of FQ4 results (2/13).

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Market commentary provided by Hammerstone Markets, Inc, a firm separate from and not affiliated with Regal Securities. Regal Securities has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.